BlackRock’s Vecht: Emerging Europe offers exceptional value
The manager claims his golden rule – “cheap companies that are not going to go bankrupt make you good money” – can currently be applied to the majority of businesses in the region.
By Mark Smith, Senior Reporter
Thursday June 14, 2012
The global flight from risk is creating a huge value opportunity in unfashionable areas, says BlackRock’s Sam Vecht
, who believes eastern Europe is currently at a particularly attractive entry point.
The manager of the Eastern European Trust
is surprised at the pessimism in the market but is happy to take advantage of the cheap valuations that are being created as a result.
"I’m bullish on equities for only the third time in my career," he said. "The extent of some of the bearish positioning is remarkable; bonds are exceptionally expensive right now."
"There is one golden rule: buying cheap companies that are not going to go bankrupt makes you good money."
Vecht, who is also director of emerging markets at BlackRock, says that the idea of investing in Russia and the rest of eastern Europe is met with a great deal of prejudice. However, the fundamentals are much better than most investors imagine.
"When one thinks of eastern Europe one thinks of political crisis, one thinks of corruption, one thinks of all sorts of things, but growth has been consistently good year on year."
"Whilst the eurozone debt crisis was a recurrent concern of the past year, most eastern European countries are in better fiscal health, with lower sovereign debt burdens – considerably lower than the European average – and low budget deficits."
"The East should be viewed as fundamentally distinct from the highly indebted peripheral European economies which are the focus of current financial worries."
Low tax rates, a skilled workforce and undervalued currencies have made eastern Europe an attractive place to do business, and this has been recognised by China, whose industry has been moving aggressively into different markets in recent years.
"Chinese automobile manufacturer Great Wall Motor Company opened its first European plant in Bulgaria in February of this year because it now considers it to be a cheaper manufacturing location than China for its product."
The Eastern Europe Trust was taken over by BlackRock exactly three years ago and in that time it has returned 33.63 per cent compared with 24.9 per cent from its MSCI EM Eastern Europe 10/40 benchmark, according to FE data.
Performance of trust vs benchmark over 3-yrs
Source: FE Analytics
Vecht believes that Russia is a particularly interesting area within eastern Europe. He says the performance of its stock exchange since the last election has been disappointing but that Putin’s plans for new economic reforms are expected to take the brakes off the market.
FE Alpha Manager Elena Shaftan
, who manages the Jupiter Emerging European Opportunities fund, told FE Trustnet last month
that Putin recognises the need to attract foreign investment and is committed to fighting corruption within Russian business.
Vecht says he is already seeing signs of improvement on the ground.
"There have been a number of unheralded corporate governance improvements in Russia, not least a drive to increase dividend payouts offered by state-controlled Russian companies," he explained.
"Practical progress is already underway, with companies such as Gazprom more than doubling their dividend in the past year. For the first time, Russia has a dividend yield similar to that of global emerging markets, making it a new destination for investors seeking income."
Anyone looking to gain access to opportunities for investment in eastern Europe have a number of options to consider. Vecht’s Eastern European Trust is the standout performer in the closed-ended universe. It is currently trading on a discount of around 9 per cent.
An open-ended alternative is the Baring Eastern Europe
or the more general Fidelity Emerging Europe Middle East and Africa